She had spent more than a decade at Smith Barney before Morgan Stanley took control of the retail broker from Citigroup Inc , but she was getting increasingly frustrated that the firm could not lend money to clients to refinance their yachts and vacation homes, people familiar with her thinking said.
So in the couple of minutes it takes to walk from one firm to another on Wilshire Boulevard - past palm trees, a Sotheby's realty office and the Mexican restaurant El Torito Grill - Morgan Stanley lost USD 2.5 billion in client assets to its rival.
In wealthy enclaves across the United States, Morgan Stanley has suffered a series of defections of top advisers such as Rothstein, in part because they think the firm is weak at providing loans to private banking clients compared with rivals owned by commercial banks.
Merrill, a unit of Bank of America Corp , has about 600 bankers working with brokers, for example, compared with 170 bankers at Morgan Stanley. In the third quarter, Merrill reported USD 1.5 billion in net interest income, compared with USD 410 million for Morgan Stanley's wealth unit.
"It's built right into the system at Merrill in terms of people and technology," said Mark Albers, a former manager at Merrill, who is now president of the wealth management recruiting firm Albers & Associates Consulting.
Albers said advisers at both firms have told him that lending is "significantly stronger and significantly easier" at Merrill than it is at Morgan Stanley.
Morgan Stanley spokesman James Wiggins said its wealth management unit offers competitive specialised loans through its tailored lending program. Although its loan book is not as big as rivals, the firm is working to build up that area and sees it as a significant growth opportunity, he said.
Morgan Stanley needs its global wealth management unit to provide a steady income stream as traditional investment banking and trading businesses come under threat from more regulation, higher capital requirements and a moribund global economy.
The success of the wealth business depends on its ability to retain brokers, bolster profits from lending and other products, and curb costs. It could play a big role in determining Morgan Stanley's fate, as well as that of CEO James Gorman and the wealth management unit's head, Gregory Fleming.
"We're building wealth management to be one of the pillars of Morgan Stanley's future," Fleming said in an interview.
He now oversees some 17,000 brokers, on par with Merrill, making them the two largest US brokerages.
Still, more than a dozen current and former Morgan Stanley brokers told Reuters they felt the firm's lending practices put it at a competitive disadvantage. Four brokers said they quit to join the likes of Merrill and Wells Fargo & Co in part because these firms made it easier to pitch loan products.
While Morgan Stanley has a robust securities lending business, brokers said the firm is not as strong when it comes to helping wealthy individuals finance specialized purchases such as yachts, luxury cars and organic farms. Brokers also say the firm does not consistently offer competitive lending rates.
"Lending was the main reason I left," said one adviser, who quit Morgan Stanley for Merrill within the past six months. "When people want to do business with you and you can't provide a solution, it impacts your ability to serve your clients, make money for the firm, and for my family."
The adviser said his clients wanted to do things such as secure lending and collateralized lending, which his team could not do easily at Morgan Stanley. In the past month at Merrill, he closed two lending deals and received an inquiry to borrow USD 80 million.
"Clients are looking for growth capital and now we can provide it," he added.
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